Less Foreign Money Flows To US Markets

By
Guy Halverson /
April 15, 1991

NEW YORK

THE United States dollar has been climbing again in relation to overseas currencies. Smaller stocks have been nudging US equity markets higher. And many economists expect the recession to be over by mid-summer. Are these factors enough to lure overseas investors - who have been tempted by high interest rates abroad to keep their money at home of late - back into US capital markets? An infusion of overseas capital, whether in terms of direct foreign investment or purchases of stocks or bonds, helps hold down US interest rates, provides funds for American companies to expand, and stimulates long-term North American economic growth.

But no big infusion of overseas capital can be expected this year or for the next few years, says Nicholas Sargen, a capital markets expert with Salomon Brothers. While US equities are expected to look better to foreign investors this year than in 1990, there will likely not be a repeat of the record inflows to the US that characterized the mid-to-late 1980s, he says. Nor will much new money be coming for direct investment and purchase of US bonds.

In terms of attracting overseas capital, the 1980s were golden years for the US. According to David Strongin, director of international finance for the Securities Industry Association (SIA), overseas investors made net purchases of almost $65 billion in US equities during that decade. At the beginning of the '80s they held some $48 billion in equities; given continued purchases and market appreciation they owned equities worth about $257 billion by the end of the decade. That represents about 7 percent of all US equities outstanding.

That year, for the first time since 1974, according to Mr. Strongin, the US ``suffered a net portfolio outflow.'' US investors bought, on a net basis, more non-US securities than foreign investors bought US securities, on a net basis.

The largest sellers of US financial instruments last year were Japanese investors.

As noted by Salomon Brothers, the overall balance in private capital flows (including stocks, bonds and direct foreign investment) shifted to net outflows of $32 billion in 1990, compared to net inflows of $88 billion in 1989 and $81 billion in 1988.

Mr. Sargen, who tracks current capital flow data through meetings with global fund managers and other sources, believes that some net buying of US equities is now occurring by European investors. Japanese investors, he says, might follow suit, but probably not in terms of much new capital, given intense capital demands within Japan.

Throughout the late '80s, overseas purchases of equities averaged less than $9 billion annually. The peak year was 1986, with $17.2 billion from abroad.

Far more important, in terms of overseas capital, was the purchase of US bonds and direct foreign investment in plant and equipment. During the late 1980s, the two areas averaged around $100 billion combined annually, Sargen notes. But in 1990, bond buying fell off because of high interest rates abroad, particularly in Germany. US rates are not expected to get back above European rates any time soon - certainly, not above German rates.

One result of the more modest capital inflow, says Strongin, will be that US interest rates will ``be a little bit higher than they might otherwise be.'' But, he says, there are steps that could be taken to compensate for the more modest the capital inflow, such as reduced federal spending from Washington, since government credit demands impose upward pressures on interest rates.

If overseas capital isn't about to surge to the US in the grand manner of the late 1980s, which countries will be beneficiaries? Most experts would say Japan and continental Europe - West Germany, in terms of fixed instruments, and non-German companies, in terms of equities.